MuleSoft IPO | S-1 Breakdown

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Company and Product Summary

MuleSoft, the leader in cloud-based application integration technology, has filed for a $100M IPO, and plans to trade on the NYSE under the ticker, “MULE”. Goldman Sachs is the lead-left bookrunner and J.P. Morgan and BofA are joint lead-bookrunners. The company was founded in 2006 and is another enterprise software unicorn to file publicly for an IPO. MuleSoft’s cloud platform is the go-to choice for enterprises that want to unify and scale their application networks through APIs. MuleSoft has been growing rapidly and recorded $152.8M in subscription & support revenue last year, which grew at a 78% CAGR from 2014–2016. MuleSoft ended 2016 with 841 FTEs and is headquartered in San Francisco, CA.

As enterprises move to the cloud and IT infrastructure becomes more and more complicated, legacy IT breaks down. MuleSoft’s Anypoint Platform enables customers to connect applications, data and devices into their own “application networks” using APIs (application programming interfaces), rather than hardwired custom code and integrations. The Anypoint Platform is a hybrid integration solution that supports any integration use case, including both on premise and cloud-based integrations as well as full life-cycle API management. Historically, enterprises have used customer point-to-point integrations which are expensive, time-consuming, and brittle when changing endpoints, data structures or business processes. MuleSoft’s product allows companies to build and rapidly scale their application networks, which become building blocks that can be reused, dramatically decreasing the time to value for developers working with new applications. As more and more applications are built, the application network expands, making it even faster as developers can build onto the existing network. MuleSoft believes this drives network effects that increases speed for developers and lowers costs for customers.

MuleSoft gives a couple of potential customer challenges that their product could solve 1) a mobile banking application not only draws data from financial systems, but from payments engines, location-based services, mobile security, and dozens of other data sources 2) in healthcare, patient outcomes can depend on real-time connectivity to patient profiles and portals, EMRs, prescription records, lab data and wellness applications. To connect these disparate applications previously, IT orgs have created one-off custom projects that are inflexible, costly, and difficult to manage, creating bottlenecks. With MuleSoft, these customers would have a single, API-driven solution to connect applications and devices to their own networks, using MuleSoft as the core building blocks. MuleSoft has also cultivated a large and growing developer community of which they have over 175,000 today.

MuleSoft ended 2016 with almost 1,100 customers across 60 countries in every major industry, with customers such as Citrix, Coca Cola, McDonald’s, Office Depot, Salesforce, Spotify, Toyota and many others. No customer was more than 10% of revenue over the past 3 years, and MuleSoft has multiple customers in the top 10 of massive industries like auto, financial services, healthcare and consumer packaged goods. The company sells to customers primarily through direct sales and partners with system integrators to help with implementations. They also have 30 customers that pay over $1M in ACV (annual contract value) and obviously focus their sales efforts on large enterprises. MuleSoft prices based on computing capacity and can be deployed either in the cloud or on premise. Contracts are mostly annual and their average new ACV was $169K in 2016, up from $77K in 2014. Customers paying over $1M in ACV has grown from 5 in 2014 to 30+ today.

Market Opportunity

MuleSoft paints a very large market opportunity and their S-1 market section contains some of the following stats; SaaS applications have grown to over 3,000 today, data volumes will grow to 44 zettabytes by 2020, up from 4 in 2013, and the number of connected devices will reach 20.8B in 2020, up from 4.9B in 2015. In terms of market size, MuleSoft believes their potential SAM (served addressable market) to be $29B, based on the number of global companies with more than $50M in revenue, of which they multiply against an estimated ACV. Forrester estimates $32B will be spent in 2017 on integration software, and $394B will be spent on system integration project work, some of which MuleSoft believes they can convert into software spend through their product.

Competition

MuleSoft primarily competes with software and services from companies like TIBCO, IBM, Oracle, Apigee, SnapLogic and also with in-house/custom development efforts. TIBCO and Apigee are more pure-play competitors — TIBCO was acquired by Vista Equity in 2014 for $4.3B and Google acquired Apigee for $625M in 2016. Both were public companies at the time of acquisition.

Investors

The company has reportedly raised $259M from investors including Lightspeed, Hummer Winblad, NEA, Morgenthaler, Sapphire Ventures, Meritech, Salesforce Ventures, Adage Capital Management, Brookside Capital, Greenspring, Sands Capital, Cisco, ServiceNow, and Bay Partners. 5% pre-offering VC stockholders include Lightspeed (17.1%), Hummer Winblad (15.8%), NEA (14.3%), Morgenthaler (7.5%), Sapphire Ventures (6.8%) and Bay Partners (6.3%). Their last reported valuation was $1.5B in a $128M round led by Salesforce Ventures.

Financials and Metrics

MuleSoft is growing very quickly, and recorded $187.7M in revenue in 2016, up 70% YoY. Multiplying the last quarter’s subscription revenue by four, it implies $180M of ARR, which they have been growing by an average of 16% for the past eight quarters. There is a professional services component to MuleSoft’s revenue, which was 19% of total revenue in 2016, slightly down from 20% the year before. Their subscription gross margin was 91% last year, while they essentially broke even on professional services at a (1)% gross margin. Like many other fast-growing enterprise software businesses, MuleSoft operates at a loss and recorded $(49.6)M in GAAP net income in 2016 at a (26)% earnings margin. That was significantly better than the year before where they had a $(65.4)M GAAP loss at a (59)% margin. 2014 was a greater loss, and the business obviously has operating leverage. I imagine they will show investors a path to GAAP profitability in 2–3 years. In terms of sales efficiency, their average payback period over the last 8 quarters was 20 months (non-GAAP). You can see other public SaaS company averages here.

MuleSoft does give the public good insight into some of their non-GAAP metrics. They disclose customers, average subscription revenue/customer, average new ACV, dollar-based retention, free cash flow & margins, and a cohort analysis. Their continued new customer wins and the growth in both average subscription revenue/customer and new ACV is a testament to how the company keeps moving up-market into larger enterprises. They added 249 customers in 2015 and 232 in 2016, but the average subscription revenue/customer increased dramatically to $143K, up from $105K in 2015. Average new ACV was at $169K in 2016, up from $117K in 2015. Their implied ARR over customers shows a $168K average ACV across their 1,071 customers. Dollar-based net retention was 117% in 2016, slightly down from 121% in 2015 but up from 110% in 2014. Their cohort disclosure shows a few impressive stats too — their 2012 cohort, which was $4.5M in ACV, increased their spend to $11.2M in 2016, a 2.5x increase (and CAGR of 25%+). Moreover, the ACV from customers that represented more than $1.0 million in ACV in 2016 has increased to an average of 6.0x the ACV of such customers’ initial purchases made in 2012 or later. It’s quite common for software companies to disclose the land-and-expand story cohort analysis. As MuleSoft’s customers grow their software footprint, so does their spend with the company.

Annual P&L (000's)

Quarterly Subscription/Support Revenue ($M)

Implied Ending ARR Over Past 8 Quarters ($M)

MuleSoft is growing their implied ARR quickly, although their net new ARR is not growing sequentially quarter-over-quarter as you can see in the chart below. Over the past year they have added almost $70M of net new implied ARR.

Note: Implied ending ARR calculated by multiplying quarterly subscription/support revenue by four.

Average Subscription Revenue per Customer and New Customer ACVs

Cohort Output from S-1

Cash Flows (000's)

Quarterly P&L (000's)

Valuation

I expect MuleSoft to be priced like other fast-growing SaaS companies, and the primary valuation metric will likely be an EV/NTM revenue multiple (enterprise value over next-twelve-months revenue). High-growth software companies trade at a ~5–6x NTM revenue median, and some closer to 10x or more (this comp set includes businesses like Salesforce, Workday, ServiceNow, Veeva, etc). For context, AppDynamics, the last enterprise software company to file publicly, was acquired at a 17.3x LTM (last-twelve-month) revenue multiple, and while they didn’t disclose their growth rates going forward publicly, it was likely acquired above a 10x NTM revenue multiple. MuleSoft grew revenue 70% YoY in 2016, and I suspect they will grow at least 50% in CY 2017. Looking at some simple math and a range of growth rates and peer multiples, you can see the illustrative enterprise values below. This could change quite a bit from their initial filing to pricing, but if I had to guess I think they will price somewhere in the blue-shaded area in the table below.


I think MuleSoft will have a successful IPO — they are the leader for enterprises looking for an application integration platform that uses using a modern, API-driven approach, and the underlying metrics of the business are strong. They are growing revenue and more importantly subscription revenue very quickly, and are showing clear leverage in their operating model as they move further up-market into larger organizations. I do think MuleSoft fits the mold of what public market investors like to see in fast-growing software businesses, and I am looking forward to their trading. Congrats to the MuleSoft team on building such a great business.

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